With Groupon’s stock in the gutter, the deals space received some much needed positive news last week, when a study released by Rice University found that daily deal performance has increased over the past year. According to the study, which followed 641 small businesses over three periods since the spring of 2011, nearly 62% of business surveyed in the spring of 2012 said they made money on a daily deal — a 6% increase from a year earlier.
The bigger finding here is that the daily deal is far more “sustainable” than previously thought. The study took a deep dive into the longitudinal impact of daily deal campaigns and found that key performance metrics like customer acquisition and value remained steady even as businesses ran seven or more campaigns. “Sustainability” has long been a point of criticism for the deals space, and the findings help buttress the industry against the increasingly negative portrayal of daily deals as one-and-done service.
Street Fight caught up with Utpal Dholakia, the author of the study, to discuss what the research means for the industry and how “daily deal” companies can react.
The deals space has had a tough go of it over the past 12 months. Why should we be optimistic?
In a nutshell, we found that the “daily deal” is a sustainable marketing program for 30-35% of businesses. We classified businesses as finding daily deals to be “sustainable,” when they had run seven or more daily deals, and said that they plan to run more daily deals in the future. My assumption here is that if you have run a bunch of deals and want to run more in the future, this marketing program works for your business.
We also looked at changes in performance metrics over time, and one of my hypotheses was that, as business who ran multiple daily deals, they would be getting the same customers over and over again. But this wasn’t the case. We found that even for merchants who had run seven or more daily deals, the mix of new and existing customers remained the same.
What in your findings concerned you?
On the negative side, what’s surprising is that the conversion rate and the spending levels don’t seem to be improving with experience. One would think that as merchants run multiple deals, you would expect that they would have figure out how to get people to spend more money in their store — but that doesn’t appear to be the case.
It’s hard to tell why. A lot of this might be simply because there is inertia — merchants might be running the same daily deals over and over again, while using the same metrics in dealing with customers.
We found that daily deal sites are doing as well or even better than last year, especially Living Social. They’re getting more of a margin, more of a share of the revenue, compared to last year. If you think in terms of stabilization of the industry and so on, I think it’s a huge deal.
Do you find that SMBs are loyal to one or another daily deal provider?
What we consistently found was that only a handful of SMBs run all of their daily deals through a single site. There aren’t too many merchants that are say, “Groupon loyal.” They will do one with Groupon and then one with LivingSocial and then one with some third local site. But what tends to happen — again, this is based strictly on anecdotal evidence — is that they tend to run the same offer through multiple daily deal sites.
If the daily deal as a product has become standardized, or even commoditized, what’s driving merchants to switch daily deal providers?
From what the merchants tell us, the biggest driver is that they don’t want to get the same customers. They feel that if they run consecutive deals with the same company, they’re going to get the same customers as the first time around. They consistently say: “LivingSocial customers are quite different from Groupon customers which, are both quite different from other sites.” It’s very much about audience.
Is revenue-share playing a big role in SMBs’ decision-making?
This is interesting. Over the past year, nearly every expert in the daily deal industry, including myself, has speculated that the margins of the business are going to go down. What I found out was that this was not the case at all — we found that daily deal sites are doing as well or even better than last year, especially LivingSocial. They’re getting more of a margin, more of a share of the revenue, compared to last year. If you think in terms of stabilization of the industry and so on, I think it’s a huge deal.
What is interesting is that only a handful of SMBs actually negotiate with the daily deal providers on price. They are basically signing on whatever offer the daily deal site makes them. The cut doesn’t seem to be a big deal in merchant’s decision making as far as the site with which the choose to run a deal. Again, the big driver here appears to be: “I’ve already run one deal with Groupon, and I don’t want the same customers Groupon is going to bring in.” The logic here is different. It’s not driven by price; it’s driven by audience.
So there’s essentially a very high churn rate in the daily deals space. What does this tell us about the overall health of the space?
It is definitely a good sign for the industry in that it indicates a willingness, on part of merchants, to run daily deal programs over and over again. If SMBs were running only running two or three Groupons or LivingSocials and then got fed up and stopped doing them, that would be a bad thing for the industry as a whole. This switching around makes a lot of logical sense, but it also makes the daily deal viable to be run again and again for the merchant. So, for the industry, I think it’s a very good thing.
If I’m a daily deal provider and I have X amount of dollars to spend on merchant acquisition, who should I target?
First, we’ve found that the drop out rates — i.e. businesses that have run a deal but tell us that they do not plan to run another in the future — are much lower for salons and spas than for restaurants and retailers. Only one in of five [restaurants and retailers], which have run a deal, has run seven or more daily deal campaigns — that’s an 80% dropout rate. For spas and salons, that metric is somewhere around 60%. We also found that new businesses — defined as businesses that launch within the last six years — have higher retention rates and lower dropout rates.
So if you’re a daily deal business it makes a lot of sense to go after salons and spas that were started in the last six years.
If price and product are not driving value for SMBs, where can business look to innovate to drive real value for merchants?
The main issue here is that most daily deal players position themselves as “daily deal” sites, in that they provide a daily deal promotion and that’s it. What small businesses really need, and what they are asking for, is marketing help. They are much more interested in someone coming in and doing all the marketing for them, which means that there is a lot of room for those in the deals space to help them with social marketing or coming up with a strategy for using Google Analytics and buying AdWords. Those are all ancillary services that are currently either done in a very poor fashion or not at all by the operators themselves.
This is where I think there’s a big opportunity moving forward. The future of the daily deal industry is who can do this better. That’s what the merchants really want.
From an academic point of view, would you classify the daily deal business an “industry” or is it something else?
People call it an “industry,” they call it a “segment,” and they call it a “space.” But from my point of view, it’s definitely an industry. The way to define an industry is if it sells something, which is non-substitutable. From my point of view, I don’t think most SMBs substitute between daily deals and other types of promotions. If they started doing that then you would call it a space or a segment, but right now this is an industry in itself.
Steven Jacobs is Street Fight’s deputy editor.